It’s showdown time.

The IMF has threatened it will pull out of the Greek bailout program unless Greece gets debt relief.

German Chancellor Angela Merkel, Austria, Finland, and the other Eurozone creditors will not like today’s development one bit.


Please consider IMF Tells Eurozone to Start Greek Debt Talks.

The International Monetary Fund has told eurozone finance ministers they must immediately begin negotiations to grant debt relief for Greece despite German opposition, upending carefully orchestrated negotiations ahead of an emergency meeting on Monday.

In a letter to all 19 ministers sent on Thursday night and obtained by the Financial Times, Christine Lagarde, the IMF chief, said stalemated talks with Athens to find €3bn in “contingency” budget cuts, which have gone on for a month, had become fruitless and that debt relief must be put on the table immediately, or risk losing IMF participation in the programme.

Athens is facing €3.5bn in debt payments in July that it needs bailout aid to pay, and EU officials have told Greek government officials they do not want messy negotiations to continue during the Brexit campaign — meaning if no agreement is reached this month, leaders will not begin discussions again until just weeks before a possible default.

Similar last-minute talks a year ago rattled the Greek economy and raised questions about whether Greece could be ejected from the eurozone.

Relations between the IMF and Athens, already strained after last year’s brinkmanship, have reached a new low in recent weeks following WikiLeaks’ publication of a transcript of a private teleconference between Mr Thomsen and other IMF officials — a transcript Greek officials claimed showed the IMF was negotiating in bad faith.

Ms Lagarde stuck by the IMF’s assessment that such reforms would only produce a primary surplus of 1.5 per cent in 2018 — not the 3.5 per cent the EU has mandated.

“We do not believe that it will be possible to reach a 3.5 per cent of GDP primary surplus by relying on hiking already high taxes levied on a narrow base, cutting excessively discretionary spending, and counting one-off measures as has been proposed in recent weeks.”

Leaked Letter

Dear minister:

Program discussions between Greece and the institutions have made progress in recent weeks, but significant gaps remain to be bridged before an agreement can be reached that would include the IMF under one of our program facilities. I think it is time for me to clarify our position, and to explain the reasons why we believe that specific measures, debt restructuring, and financing must now be discussed simultaneously.

In particular, a clarification is needed to clear unfounded allegations that the IMF is being inflexible, calling for unnecessary new fiscal measures and – as a result – causing a delay in the negotiations and the disbursement of urgently needed funds.

First, together with the other institutions we have negotiated in good faith with our Greek partners on a package of fiscal measures yielding 2.5 per cent of GDP – close to being agreed – that will in our view be sufficient to reach a primary surplus of 1.5 per cent of GDP by 2018. Our assessment is based on realistic assumptions informed by Greece’s track record, the international environment, and the latest data released by Eurostat.

Second, this target falls short of what Greece promised its European partners in July last year – namely that it would achieve a primary surplus of 3.5 per cent of GDP in 2018. If the Eurogroup decided to hold Greece to this target, we could support an additional effort to temporarily reach this level, although it is higher than what we consider economically and socially sustainable in the long-run (see below).

However, let there be no doubt that meeting this higher target would not only be very difficult to reach, but possibly counterproductive. Greece’s fiscal adjustment has in the past fallen short of what was needed because of the lack of structural reforms underlying the adjustment effort. We do not believe that it will be possible to reach a 3.5 per cent of GDP primary surplus by relying on hiking already high taxes levied on a narrow base, cutting excessively discretionary spending, and counting on one-off measures as has been proposed in recent weeks. The additional adjustment effort of 2 per cent of GDP would only be credible based on long overdue public sector reforms, notably of the pension and tax system.

Unfortunately, the contingency mechanism that Greece is proposing does not include such reforms. Instead, the authorities have offered to make short-term across-the-board cuts in discretionary spending – which has already been compressed to the point where the provision of public service is severely compromised – or transitory cuts in pension and wages not supported by fundamental parametric reforms. Based on past performance, such ad-hoc measures are not very credible, but they are also undesirable as they add to uncertainty and fail to resolve the underlying imbalances. I should also add that Greece has legislated a dozen contingency-type mechanisms in the past that have largely not worked.

Third, going forward, we do not expect Greece to be able to sustain a primary surplus of 3.5 per cent of GDP for decades to come. Only a few European countries have managed to do so, carried by a strong social consensus that is not in evidence in Athens. It would be unrealistic to expect future governments to resist pressure to relax fiscal policy over political cycles stretching far into the future. The recent experience – when first a center-right and then a center-left government quickly succumbed to easing pressures once a small primary surplus was achieved – should inform us against making such exceptional assumptions in the case of Greece. In our view, maintaining a primary surplus of 1.5 per cent of GDP over the foreseeable future may be achievable in the context of a successful program and strong European budget surveillance for many years to come thereafter.

understand the urgency of the situation in the case of Greece and Europe as a whole, and our common objective is to quickly agree on a way forward. This requires compromises from all sides, and we have contributed our part by focusing conditionality on what we see as the absolute minimum, leaving important structural reforms to a later stage. However, for us to support Greece with a new IMF arrangement, it is essential that the financing and debt relief from Greece’s European partners are based on fiscal targets that are realistic because they are supported by credible measures to reach them. We insist on such assurances in all our programs, and we cannot deviate from this basic principle in the case of Greece. The IMF must apply the same standard to Greece as to other members of our institution.


Christine Lagarde

Loaded Gun

I am uncertain if the emphasis in bold is by Lagarde or the Financial Times, but I suspect the latter.

This “purposely leaked” letter puts enormous pressure on German chancellor Angela Merkel who is already under severe strain due to her complete bungling of the refugee crisis.

Pick Your Poison

  1. The German parliament only agreed to do this deal if the IMF was in it.
  2. The Germany parliament only agreed to do this on the specific terms previously offered.

The terms included no more debt relief, Greece primary surplus (budget surplus not counting interest on debt) of 3% of GDP by 2018.

I said that would never happen and it won’t.

Lagarde’s letter stated “Third, going forward, we do not expect Greece to be able to sustain a primary surplus of 3.5 per cent of GDP for decades to come.

By the way, Lagarde knew all along Greece could not meet a primary surplus of 3.5% of GDP for decades to come. So, why did it sign the deal in the first place?

Lagarde now proposes a primary surplus of 1.5%.

Well guess what? That is nearly as unlikely as a surplus of 3.5%.

And at a rate of 1.5%, it will take decades longer for Greece to pay back the hundreds of billions of euros it owes in these programs.

So… that means outright debt reductions.

Stew of the Day

Merkel’s stew of the day is Turkey, Greece, Brexit, Italian Banks, and Draghi.

When does this toxic stew boil over?

Mike “Mish” Shedlock